Rebirth

The Tiananmen debacle resulted in a brief spell of conservatism, but within a few years, Deng Xiaoping choreographed the rebirth of reform and openness with his historic “southern tour.” With Deng’s assurance that “to get rich is glorious,” entrepreneurial energy exploded again, concentrated now in the coastal cities. The leadership, guided by economic czar Zhu Rongji, enacted a far-reaching structural transformation of the economic sphere, anchored in privatization of state-owned enterprises. Ironically, China’s lack of full reform—especially in the financial sector and monetary policy—protected the Chinese economy from the vicissitudes of hot money and capital flight that ravaged its neighbors during the East Asian financial crisis.

Deng Accepted That There Were Limits to His Expertise

Changing China's Market Framework

China's Opacity Protected it from Crisis

Entrepreneurship Was a Key to China's Boom

Francis Leung

Senior Advisor, CVC Capital Partners

Francis Leung has worked as an investment banker in Hong Kong for nearly thirty years. He has been dubbed "father of red chips" for leading the effort to get the first Chinese companies listed on the Hong Kong stock market, and managing the first initial public offering of a Chinese company on the Hong Kong stock market. He has worked closely with Hong Kong tycoon, Li Ka-shing, was Asia chairman for Citigroup Global Markets and is a senior adviser to CVC Capital Partners.

The number of Chinese companies based on Hong Kong were limited. I was looking at the bigger market, and really the domestic market. So how to get the Chinese company to come to Hong Kong and issue shares in Hong Kong was really a big exercise. At that time, the stock exchange was chaired by Mr. Charles Lee. Mr. Charles Lee is a good friend of mine. Actually, he’s a lawyer, but he’s very well known in Hong Kong and has contributed a lot to the development of the stock market here. 0:28:44. And he actually visited the Chinese government and visited Vice Premier Zhu Rongji around 1991, 1992, and suggested to Zhu Rongji that China should allow its local companies to go to overseas markets, to issue shares in the overseas markets, and raise capital from the overseas market. And he suggested that the companies should come to Hong Kong. And Zhu Rongji thought that was a good idea and accepted his proposal and then, the Chinese government selected a first group of nine candidates to allow them to experiment, to assess the international market, using domestic incorporated companies versus the Red Chips. So, the first one [domestic company] came to Hong Kong in the middle of 1992. That was after the listing, the IPO of Haihong I mentioned earlier. Haihong actually, Haihong’s IPO happened in March 1992, whereas the first listing of Chinese incorporated companies in Hong Kong was in June 1992. And we called this class of shares H-shares. H represents Hong Kong, it’s the alphabet, you know, H, Hong Kong.

So that is the first experience. Originally, when Chinese companies came to Hong Kong, they needed to get government approval. Actually, the government selected the candidates. The selection process was not determined by the market. It was not dictated by the investment bank as to which companies would appeal to investors. The selection process was dictated by the Chinese government. So, whoever had the political connections, whoever could go to Beijing and lobby the relevant authorities and get their approval, or whichever company needed the capital, went to Beijing and got the approval. And the Chinese government just published a list of candidates and the investment banks just call on their doors and try to get the mandate. But then, gradually, the Chinese government found out that this process, this non-market selection process did not work, because sometimes they selected companies which may not appeal to the market, or because the market tastes had changed. So, some companies they had selected may never be able to go to the market because of the change in market tastes. So, gradually, the Chinese government abandoned this selection process and just said that, "OK. Whoever is ready can go Beijing to seek approval." So, this IPO process is more market-oriented. The bigger boom actually started around 1997. Actually, the successful listing experience of Chinese companies has expedited the corporate transformation, or the corporate restructuring in China. Originally, when you look at the first batches of H-shares (shares listed in Hong Kong), many of them were individual companies, or were regional companies. However, when the Chinese government saw the success of the capitalist experience, they wanted to use the stock market to expedite the corporate restructuring in China. And, actually, that was one of the reasons why Zhu Rongji wanted to experiment [with] capitalism using the stock market. Because he wanted to use the stock market to improve corporate governance, to improve the quality of management, to improve transparency, to improve accountability. That was very successful, actually. Very successful.